When Does The Franchise Two-Year Rescission Period Start From?

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This article, written by Ben Hanuka, was originally published in The Lawyer’s Daily on September 20, 2019, under the title, “Start your engines: Franchise two-year rescission period”.

Author: Ben Hanuka, Law Works

This article will outline some of the factors for consideration about whether the statutory two-year limitation period in provincial franchise legislation to deliver a notice of rescission starts to run from the main franchise agreement or from any related agreement that is signed later, such as a sublease.

The issues raised in this article apply to the provincial franchise legislation in Ontario (the Arthur Wishart Act, Franchise Disclosure (2000)), British Columbia (the Franchises Act), Manitoba (The Franchises Act), New Brunswick (Franchises Act), and Prince Edward Island (Franchises Act).  It does not apply to the Alberta franchise legislation (Franchises Act), which contains materially different provisions for its equivalent mechanism, there called ‘cancellation’.  

The rescission remedy is made up of two time periods.

• The first provides for a time limit of 60 days to deliver a notice of rescission, which runs from the receipt of the disclosure document, if the disclosure document is not in compliance with its content or timing requirements. 
• The second provides for a time limit of two-year period from the date of the franchise agreement if no disclosure has been delivered (the requirement for no disclosure has been interpreted by the courts to include significantly deficient disclosure documents that do not enable a prospective franchisee to make an informed investment decision).  

Failure to deliver a notice of rescission within either period under provincial franchise legislation will result in a bar to the rescission remedy in question. The courts have interpreted this as an important requirement.  For example, a statement of claim, which is a form of a pleading, does not constitute a notice of rescission. In addition, a notice of rescission must include minimum sufficient information about the rescission demand.

It is the second time limit – two years from the date of the franchise agreement – that is the focus of this article.  The issue is whether the starting time for this two-year period runs from the main franchise agreement, or from a subsequent related agreement (in situations where that happens), such as sublease.

What is, then, a “franchise agreement” for the purpose of the two-year limitation period? 

A franchise agreement is typically understood to be the main franchise agreement between the parties.  It sets out the terms and conditions of the purchase, set up and operations of the franchised business, including obligations of operation, support, marketing, accounting, reporting, default, termination, non-compete and other restrictive covenants (both during the term and post termination), guarantee, renewal, etc.

But that is often not the only agreement between the franchisor and franchisee that relates to the franchise.  It is common in a retail franchise for franchisors to take on a head lease, either directly or through an affiliate, and sublease the premises to the franchisee. 

A sublease agreement is sometimes signed a few months or more after the original franchise agreement is signed, typically because it takes time to locate the premises and finalize the terms of the head lease. 

The process may be managed by the franchisor and may include input from the franchisee about the selection of the site, cost of renovations, and other terms and conditions.

If the sublease is signed months after the franchise agreement, should that time be the trigger for the two-year limitation?

What is the legal status of a sublease agreement in relation to the “franchise agreement”?

Franchisees point to the definition of franchise agreement in provincial franchise legislation, which defines it to mean any agreement that relates to a franchise between a franchisor or franchisor’s associate and a franchisee.  A sublease agreement clearly falls within that definition. 

Typically, in situations where the sublease is signed later, the franchisee likely did not start operations until after that time.

Franchisors would argue that the ‘grant’, i.e., the sale of the franchise, took place as part and parcel with the original franchise agreement, months earlier.  

Often, that main franchise agreement contains all terms and conditions of the business deal (obviously, not including the terms of the lease or the sublease) including, typically, the requirements and timeline for which the premises are to be located and the lease to be finalized. Similarly, that is when the franchisee committed to the deal in a legally binding fashion. 

What should happen in a scenario where the franchise agreement provides for a right for the franchisee to walk away from the deal should a location not be suitable and finalized? Is it arguable then that the deal is not materialized until a lease is in place? Or, as before, the terms are nevertheless set out in the original franchise agreement as part of the original grant? 

If the requirement for the delivery of a notice of rescission starts from the last agreement relating to a franchise, such as a sublease, that limitation period will extend to favour a franchisee. If the two-year limitation period starts from the main franchise agreement, the two-year limitation period will not extend even if there are corollary agreements signed after that time.

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